Working Paper

Title: Ethnic Chinese Networking in Cross-border Investment: The Impact of Economic and Institutional Development

Reference Number: 1024

Publication Date: April 2001

Author(s):

Sarah Yueting TongHong Kong Institute of Economics and Business Strategy

Abstract:Ethnic Chinese entrepreneurs are known for their active domestic and cross-border business networking practices, particularly in Southeast Asia. This paper empirically investigates the role of ethnic Chinese networks in promoting foreign direct investment (FDI). Using a standard gravity model to analyze bilateral FDI reported by 54 economies, we find that ethnic Chinese networks are important in facilitating cross-border direct investment between countries. The strength of ethnic Chinese networks between country pairs, approximated by the product of the numbers of ethnic Chinese in both countries, is positively correlated with the cumulative amount of their reciprocal FDI. More importantly, this significant relationship is not limited to countries in Southeast Asia, but is applicable to other country pairs included in the study as well, regardless of whether the investment originated from industrial countries or developing economies. Finally, the analysis finds no evidence that ethnic networks are only effective in countries where economic and legal institutions are under-developed. The measure for ethnic Chinese networks is found significant in promoting FDI to countries with a relatively higher bureaucratic quality, and the magnitude of the coefficient is in fact much larger than that found for FDI destined to countries with a lower bureaucratic quality.